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US News and World Report | Business & Technology | 06.04.01 Bucking
the E-biz trend
By Katherine Hobson
If you listen to Hock, it was all a matter of luck. "I had no money!" he says, laughing. "I had to make a profit from the start." Happy accident or not, Winesby .com's experience shows that online retailers are not always doomed to failure. The dust from the spectacular Nasdaq crash of a year ago is settling, and some winners are emerging. They come in all shapes and sizes, from local operations like Hock's wine delivery service to global retailing giants like Lands' End. And their success will help boost North American online sales to about $65 billion this year–still a tiny slice of total retail sales of more than $3 trillion but too big to dismiss as Internet hype.
That doesn't mean that online winners are easy to find. A recent study by the Boston Consulting Group and trade group Shop.org found that most online retailers still lose money–an average of 13 percent of sales. But the study also found that all online businesses are not created equal. To find the most obvious winners, look in your mailbox: More than 70 percent of catalog companies with online outlets now make money on them. Lands' End's E-business has been profitable at least since it started tracking online sales three years ago. The Spiegel Group, home of Eddie Bauer and its namesake catalog, also says its Internet operations make money. That's no surprise, really: Catalog companies are used to selling directly to consumers. They had already built warehouses, staffed call centers, and developed good relationships with United Parcel Service and FedEx. "They didn't have to reinvent that," says Elaine Rubin, executive director of Shop.org, the online arm of the National Retail Federation.
Bouquet of bucks. Companies leaping from the mall to the Web, like Circuit City and Wal-Mart, still fare less well: Fewer than half make money online, thanks to the big upfront cost of starting a Web site. One "bricks and clicks" company that has found a formula for profits is FTD.com, a spinoff of the 90-year-old florists' association, FTD. Consumers knew the FTD name, so FTD.com could spend less on marketing than rivals trying to build a brand from scratch. And since FTD.com refers sales from the Internet to local independent florists, it has no inventory, trucks, or stores. It has been profitable for three quarters.
But for old-line retailers, moving into E-commerce can offer indirect gains. Take Sears.com. Since it began selling Craftsman tools online in 1997, it has added such products as gifts, electronics, garden equipment, and appliances. Sears.com isn't yet making money by itself, but that misses the point, says Dennis Honan, vice president and general manager of Sears Customer Direct. Many customers research appliances on the site and then go to the store to buy them. "We know that one tenth of our appliance sales are influenced by Sears.com," he says. Add in those sales, and the Web site pays for itself.
Success stories are harder to come by in the Web-based world, where well-funded start-ups spent like crazy to build online businesses–and then found they didn't have enough cash to make it to profitability. That's where high-profile companies like Pets.com and Boo.com flamed out and many sites still struggle. Just 27 percent are profitable, says Boston Consulting Group. Still, there are pockets of strength. Some product categories appear well suited to the Web. Consumers like to buy computer hardware, software, and books online–in fact, the Internet accounts for more than 10 percent of such sales.
Travel is probably the biggest online success. Of the five online firms that win Prudential Securities analyst Mark Rowen's top rating, two are travel companies: Expedia and Travelocity. Both are profitable. Travel is "a virtual product that can be distributed 100 percent electronically, it has complicated pricing, and it's research intensive," explains Travelocity CEO Terrell Jones. And since consumers are used to buying travel packages sight unseen, online buying adds new benefits, thanks to video and photos. Same with flowers, says FTD.com CEO Michael Soenen. "It's the perfect Internet product, because customers can see what they're sending."
Size is also key: It's better to be very big, like Amazon, so as to get purchasing power with suppliers, or small and focused. "Being in the middle is definitely no man's land," says Lauren Freedman, president of the E-tailing Group, a Chicago-based consulting firm. Unbridled ambition can be a killer. Too many E-firms tried to get too big too fast. They pulled out all the stops to get customers–rock-bottom prices, free shipping–and hemorrhaged money.
Focusing on a narrow target audience pays off better. That was David Bolotsky's view when he left his job as a Goldman Sachs retail analyst in 1999 to start Uncommongoods.com, which sells unusual home accessories and gifts. Wary of how early Internet firms were pushed by venture capitalists and bankers to spend wildly to grow quickly, Bolotsky tried to keep his costs in check. After dot coms went out of vogue, he pared marketing spending even more, but, based on current sales, he still expects to turn a profit in 2003.
Winesby.com's Hock has a file full of pitches from venture capitalists who wanted to fund speedy growth and from Kozmo.com (now defunct), which courted him a year ago. Instead, he decided to go it alone and made sure his costs didn't exceed sales. His straightforward Web site design, for which he paid $1,000, hasn't changed since he launched in 2000. "People are here to shop, not to be turned on by a cork spinning," he says. Instead of advertising, he relies on search-engine referrals and word of mouth. He charged for delivery from Day 1 to cover his costs.
Tamara Totah, CEO and cofounder of DietSmart, a profitable Web site selling diet plans and support services, was similarly thrifty. Instead of using a pricey graphic designer for business cards, she turned to a neighbor, who designed them free. Technology investments are made only as membership–which she says is in the "tens of thousands"–increases.
Pick up the phone. And you won't find any of these small-scale Internet successes investing in big warehouse space. Winesby.com's small retail store, which Hock opened only because of New York licensing requirements, is also a warehouse–boxes of wine are incorporated into displays. Inventory is small; Hock buys directly from importers, taking about three shipments daily. Deliveries are sent by messenger to most of Manhattan, guaranteed to arrive within 90 minutes of an order. Unwittingly, Hock hit on another hot concept: so-called multichannel retailing. While most sales come via the Internet, Hock also sells directly from his store and takes phone orders.
Necessity can take much credit for these companies' profitable formulas. DietSmart tried to raise money from venture capitalists last spring, just as the market was crashing. Failing that, the company turned instead to private investors and a hedge fund. "Because we never had huge bank accounts, we ramped up slowly," says Totah. That pattern is going to become increasingly familiar among online retailers, says Bruce Strzelczyk, a partner with Richard A. Eisner & Co. in New York. "It's step growth–you grow a certain amount, consolidate and let time pass, then grow some more," he says.
There's still no consensus on the perfect ingredients for an online business. "No one group of retailers has the silver bullet yet," says Shop.org's Rubin. But those who are succeeding do have something in common: steady, sensible growth and a focus on making money. Sounds an awful lot like the logical way to build a real company, right? Maybe that's the business plan that should have been followed all along. |
Tired
of dot-com sob stories? Like the one about Wine.com, which laid off
employees in Napa, Calif., last month and sold itself to a smaller competitor
for a fraction of the $200 million it had burned through? Try this E-commerce
tale instead. Three thousand miles away, in a small storefront on Manhattan's
leafy Jones Street, Jeff Hock is doing fine with his